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Hoffman on price gouging (in which I take on claims made in a 7-year old blog post)

While seeking out the guns and ammo price gouging post at Mother Jones (see link here) I came across a post-Katrina 2005 Political Mojo post by Bradford Plumer on price gouging that I don’t recall having seen before, and it provides a link to a Dave Hoffman post-Katrina post at PrawfsBlawg that actually advances some empirical claims in favor of state anti-price gouging laws. Most advocates of state price gouging controls rely on arguments that come down to “I don’t think it is fair so those sellers shouldn’t be able to do it.”

(ASIDE: There is an empirical claim embedded there too – whether or not the advocate actually thinks post-emergency price increases are unfair – but the feelings of editorialists are not normally significant factors in formal policy analysis.)

“High prices will not serve to reduce demand for, say, water and gasoline, over the short term if folks think their lives are going to depend on having such commodities nearby.”

“Price gouging regulations do two things to reduce panic and regulate demand. First, they increase trust in market transactions (an SEC-like role) and thus will act to reduce “panic demand” in emergencies without increasing price.”

“Second, the regulations – when publicized appropriately – have the same information forcing effect as higher prices themselves, teaching people that there are supply interruptions and they should change their use patterns until conditions improve.”

My responses:

1. Claim #1 depends on what he means by “rational,” but my expectation is that prices do the same work of helping coordinate buyers and sellers during emergencies as before and after. Yes it is true that during times of quick changes in conditions that more of those prices may turn out to be “wrong” in the sense of too high or too low, but the pre-emergency price is almost assuredly wrong in this same sense and so will likely guarantee that outcomes won’t achieve his rationality standard however he chooses to define that term.

In any case, with a manageable definition of “rationality,” we could explore empirically whether freely-adjusting prices do better or worse than alternative price rules in helping to better clear information rationally. (By “clear information in rational ways” I take Hoffman to be referring to the market’s imperfect-but-still-normally-useful ability to reveal where goods are most highly needed.)

2. It is absolutely true that when it comes to cases in which our lives hang in the balance, consumers will do things that would otherwise be crazy. Would you pay $100 for a bottle of water? Normally no, but if I would die without it then yes. (And if I were about to die for lack of water, I should probably go to the emergency room, not the supermarket. The irony, of course, is that the emergency room would charge $100 to provide the water.)

As an empirical claim about consumer behavior, at least with respect to almost all market transactions during civil emergencies covered by price gouging laws, I’d say he is wrong but at least this is potentially testable. But to the extent we are talking about life and death, I’d say the relevance of his point to price gouging policy is essentially nil. A hurricane hits the Gulf Coast and suddenly state officials in New York and Massachusetts are warning gasoline retailers not to use the hurricane as an excuse to raise prices excessively. No New Yorker is going to die from a Gulf Coast hurricane because gasoline prices on Long Island jumped from $3.50 to $4.75 for a few days.

Of the millions of retail transactions conducted under activated state price gouging regulations, my guess is that fewer than 0.01 of a percent of them involved life and death. In the actual post-emergency retail sales covered by most price gouging laws consumers are quite capable of weighing whether they need four days of bottled water or fourteen, whether they really need to top off a nearly full gasoline tank again, and if they can get by with two batteries instead of eight, and so on.

3. The empirical claim suggested by standard economics seems contrary to Hoffman’s claim on panic buying. Since emergencies are times of heightened demand and limited supply, some panic demand and hoarding behavior is typical. Artificially low prices are more likely to result in shortages, therefore are more likely to prompt consumers to rush to stock up on supplies. Price gouging controls, in this standard economics story, promote “panic buying.” Two things that would reduce panic buying: (a) consumer confidence that stores will not run out of goods, and/or (b) belief that prices will tend to fall rather than increase over the next few days.

It might be the case that with price gouging laws on the books a consumer doesn’t have to worry about unjustified price increases, but I don’t see the connection between added trust in the market and a consumer’s decision to stock up on supplies right away rather than later. I feel like I must be missing Hoffman’s point.

4. The claim that publicized price gouging enforcement will yield the same kind of “forcing effect” of higher prices, i.e. induce equivalent conservation of newly scarcer goods and services, is eminently testable. The comparable situation in electric power might by those hot summer afternoons during which the utility (mayor, governor, etc.) calls on power consumers to help protect system reliability by voluntarily cutting demand. These voluntary calls for conservation work in the strict technical sense that some people will reduce their consumption. But compare the response rate to that among power consumers with a direct economic incentive to cut back consumption during these power system emergencies, and I’m sure publicizing emergency conditions has nothing at all like the same kind of “forcing effect” as simple economic incentives.

And, of course, it is simply not possible that, say, Governor Christie’s disaster declaration could contain all of the necessary information about which goods are now going to become how-much-more scarce in which parts of the state for how long, and how much one consumer’s needs should weigh against another consumer’s needs, etc.

Hoffman declares his motives in his concluding paragraph: “I dislike folks who intentionally profit on others’ misfortune.” Personally, I’m not so worried about intentions and I’m not worried about degree of profits. I simply want to support public policies that are best at helping people in distress get useful goods and services at reasonable terms and conditions.

Now, of course, Hoffman is for helping people in distress just like I’m for helping people in distress. The debate here isn’t which one of us secretly hates puppies, but rather which policies will work best for the people affected by emergencies. My empirical claim is that normal public policies towards retailers and pricing do a better job in helping people in distress than anti-price gouging laws do.

“One of the great mistakes is to judge policies and programs by their intentions rather than their results.” – Milton Friedman

Though in Hoffman’s case he said he was declaring his motives in response to a Iain Murray’s column in which Murray said citizens should suspect the motives of those advancing price gouging regulations.